The credit card ABS market's recovery continues at a quick pace with new-issue volume increasing as spreads in the sector tighten.
Lenders have also increased their issuance to refinance maturing debt at lower yields and to meet the demand from buyers looking for a safe haven in consumer ABS.
However, Wells Fargo said in a report released this afternon that the sector faces considerable headwinds that are probably going to hinder the sector's size.
The revolving consumer credit is growing slowly, showing that borrowers are still concerned about adding new debt. Additionally, the number of accounts pledged to trusts has been dropping along with total receivables.
Aside from this, onerous regulations are probably going to offset much of the positive effects of the tighter credit spreads, the firm said. The size of the credit card ABS market will probably drop further, although Wells Fargo expects it to stabilize in the $100 billion-$120 billion range.
The report also said that favorable credit trends including low delinquency and loss rates, sufficient excess spread and high monthly payment rates still support its view on credit card ABS as a safehaven trade.
According to the firm, the sector's issuers have begun to push the maturities of some of their new bonds out to 2017 and 2019 to take advantage of low long-term interest rates and increased demand from buyers seeking longer-term assets.
Even though the entire credit card ABS sector has benefited from improving credit trends in the last three years, there is still a lot of tiering among issuers in terms of excess spread and charge offs, Wells Fargo stated. These differences offer good relative value opportunities in nonbenchmark credit card ABS issuers, it added.
Meanwhile, in Citigroup's credit card ABS index, chargeoffs registered at 3.88% as of July 2012. This number dipped by 18 basis points month-over-month.
The day count differences resulted in some noise in reporting, and one index component saw a nonrecurring gain last month, which distorted the month-over-month comparison. Chargeoffs for JPMorgan Chase’s CHAIT trust rose by 87 basis points to 4.58% and Capital One’s COMET trust increased by 19 basis points. Meanwhile, Discover’s DCENT trust decreased by 18 basis points to a low 2.22%, according to Citi.
The index delinquencies fell by three basis points to 2.47% in July month-over-month, according to Citi. The delinquencies have decreased in 27 out of the last 31 months.
Most trusts in the Citi credit card index saw had shrinking delinquencies, which ranged from four to 12 basis points. Bank of America’s BACCT delinquencies improved by six basis points, registering 3.17% in July, Citi reported.
Meanwhile, Citi said that General Electric’s GEMNT delinquencies went up by 10 basis points at 3.68% in July.